Q1 2024 Fortinet Inc Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the Fortinet 1Q24 Earnings Announcements Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Peter Salkowski, Senior Vice President of Investor Relations. Please go ahead.

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Peter M. Salkowski: Thank you, Brianna. Good afternoon, everyone. This is Peter Salkowski, Senior Vice President of Finance and Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the first quarter of 2024. Joining me on today's call are Ken Xie, Fortinet's founder, chairman, and CEO; Keith Jensen, our CFO; and John Whittle, our chief operating officer.

I would now like to hand, the conference over to our first speaker today, Peter sell Koski Senior Vice President of Investor Relations. Please go ahead.

Yes.

Peter M. Salkowski: Thank you Breanna and good afternoon, everyone. This is Peter <unk> Senior Vice President of Finance and Investor Relations at Fortinet I am pleased to welcome everyone to our call to discuss <unk> financial results for the first quarter of 2024.

Peter M. Salkowski: Joining me on today's call are Ken Xie Fortinet, its founder Chairman and CEO and Keith Jensen, our CFO and John <unk>, Our Chief operating officer.

Peter M. Salkowski: Live call that will be available for replay via webcast on our Investor Relations website Ken.

Peter M. Salkowski: This is a live call that will be available for replay via webcast on our investor relations website. Ken will lead our call today by providing a high-level perspective on our business. Keith will then review our financial and operating results for the first quarter of 2024 before providing guidance for the second quarter of 2024 and updating the full year. We'll then open the call to questions. During the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate.

Peter M. Salkowski: Ken will bring our call today by providing a high level perspective on our business. Keith will then review our financial and operating results for the first quarter of 2024 before providing guidance for the second quarter of 2024 and updating the full year. We'll then open the call for questions. During the Q&A session. We ask that you. Please limit yourself to one question and one follow up question to allow others to participate.

Peter M. Salkowski: Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular the risk factors, in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements.

Speaker Change: Before we begin I'd like to remind everyone that on today's call, we will be making forward looking statements and these forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected please refer to our SEC filings in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information all forward looking statements reflect our opinions.

Speaker Change: Only as of the date of this presentation and we undertake no obligation and specifically disclaim any obligation to update forward looking statements also all references to financial metrics, which we make on today's call are non-GAAP unless stated otherwise our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's remarks.

Peter M. Salkowski: Also, all references to financial metrics which we make on today's call are non-GAAP unless otherwise stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on our investor relations website. The prepared remarks for today's call will be posted in the quarterly earnings section of the investor relations website immediately following the call. Lastly, all references to growth are on a year-over-year basis unless noted otherwise.

Speaker Change: Both of which are posted on our Investor Relations website.

Speaker Change: Repaired remarks for today's call will be posted on the quarterly earnings section of the Investor Relations website immediately following the call lastly, all references to growth are on a year over year basis, unless noted otherwise I will now turn the call over to Ken.

Ken Xie: I'll now turn the call over to Ken.

Ken Xie: Thank you, Peter, and thank you to everyone for joining our call. In Q1, we managed business with strong spending discipline and increased our operating margin by 200 business points to a first quarter record of 28.5%. We also generated record cash flow for operations of $830 million, and our adjusted free cash flow margin was 61%.

Ken Xie: Peter Thank you to everyone for joining our call Q.

Ken Xie: Q, what we manage the business with strong spending discipline and increase our operation margin 200 basis points to a first quarter record our 28, 5%.

Ken Xie: Also generated record cash flow accretion of $830 million.

Ken Xie: Adjusted free cash flow margin was 61%.

Ken Xie: We remain focused on investing in a fast-growing unified SaaSy and secure operations market, which combined accounts for one-third of first-quarter revenues. We continue to gain security networking market share, leveraging our advanced, differentiated 40OS and 40AC technologies, with an increasing number of large customers adopting our industry-leading secure networking solution. Last month's attendance at and our annual accelerated conference increased 25% year-over-year to nearly 5,000 participants.

Speaker Change: We remain focused on investing in our fast growing unified SaaS fee <unk> market, which combined accounted for one third of first quarter billions.

Speaker Change: We continue to gain security networking market share leveraging our advanced differentiate for AOS and <unk> technologies.

Speaker Change: We've got an increasing number of a large customer adoption of our industry, leading <unk> solutions.

Speaker Change: Last month I attended an hour.

Speaker Change: And you are salaried conference increased 25% year over year to nearly 5000 participants.

Ken Xie: Our unified strategy and new AI offerings dominate the discussion with our partners and customers. For the first quarter, unified strategy accounted for 24% of total buildings. To introduce customers and prospects to a new unified strategy solution, we plan to run an attractive promotion this year in 2024. For several reasons, we believe no cybersecurity company comes close to a differentiated universality solution. First, we have developed all the unified Celsius functionality into one single operating system, 4DOS.

Speaker Change: The first assay and a new EA offering dunman that discussion with our partner on the customers.

Speaker Change: First quarter unified SaaS contract for 24% of total billings.

Speaker Change: To introduce customer and prospect to a new.

Speaker Change: Unified SaaS solution, we plan to grow attractive promotion this year in 2011.

Speaker Change: For several reasons, we believe no service it could company come close to what differentiate <unk> solutions.

Speaker Change: We have developed all units SaaS <unk> functionality into one single aisle previous system. A <unk> 40 loss. This include a four networking security stack comp.

Ken Xie: This includes a full networking and security set, comprised of APNA, SecureWire Gateway, CASB, and our market-leading SD-WAN and firewall technologies, providing content, application, user, device, and location awareness to reduce attacks. Second, our unified safety solution can be deployed on-premise, in the cloud, or both. Peer Solutions Center traffic to cooperate with the POP, increasing security risk and latency, and it's less efficient

Speaker Change: Ah Utsa secure web gateway, <unk>, and our market, leading SD Wan on firewall technologies, providing content application user device and location awareness to reduce that tax.

Speaker Change: Second our unified SaaS solution can be deployed on premise in the cloud or both.

Speaker Change: Peer solution incentives Hartley to cope with the pump.

Speaker Change: <unk> security risk and agency and it's less efficient.

Ken Xie: Last, Fortinet University offers both traditional software endpoint agents and hardware agents such as FortiWiFi access point and FortiSwitch for customers, with easier deployment and more broad use cases, such as unified SASE for OT and IoT devices. We expect our differentiated, unified SASE offering to emerge as a SASE leader. Fortinet Advanced Platform Approach has been earning third-party awards for many years. Last month, we entered the Ghana Magic Quadrant for Secure Service Edge, as shown on slide 12 in the UMass presentation.

Speaker Change: Lost Fortinet <unk> SaaS offer both traditional software endpoint agents and higher agent such as <unk> 40, Wi Fi access point and 40 switch for customers.

Speaker Change: With easier deployment and the more broad use case, such as immune for SaaS for Ot and Iot devices.

Speaker Change: We expect our differentiated insights SaaS offering to emerging as a SaaS leader.

Speaker Change: Quoting that advance the platform approach has been earning third party awards for many years.

Speaker Change: Last month, we entered upon the magic quadrant for secure service age as show on the slide 12 in the Investor presentation.

Ken Xie: Fortinet is the only vendor recognized in the Magic Quadrant report for Security Service Edge, SD-WAN, Single Vendor SASE, Network Firewall, and Enterprise Wireless LAN infrastructure. All five security and network offerings from Fortinet are uniquely built on one operating system, the FortiOS, and leverage FortiASIC to increase security computing power for more functions and better performance while lowering the cost and energy consumption. Fortinet Secure Ops solutions, which are better integrated and automated together than competitors, accounted for 9% of total billing.

Speaker Change: <unk> is the only vendor recognized in the Magic Quadrant report for security service Edge SD Wan single vendor SaaS network firewall and annual price of Wired and wireless Lan infrastructure, all five securely on a network offering.

Speaker Change: And uniquely built on one operations they sit in a $40.

Speaker Change: In our language all 48 states to include secure computing power for.

Speaker Change: So more functions and the better performance, while lowering the cost of energy consumption.

Speaker Change: Putting a secure office solution, which our Panther integrated ultimate casually than competitors accounted for 9% of total billings.

Ken Xie: Initially launched as part of FortiSIM and FortiSOAR, our Gen-AI technology, FortiAI, is being deployed across both networking and security products. And today, we announced the industry's first IoT security generative AI assistant; customers can ask for the AI to help in 30 plus languages. Fortinet is also the market leader in OT security solutions, the fastest growing space in network security with billions of devices connected online. And most OT devices have limited computing power, making network security the most effective means of security.

Speaker Change: Initially launched hot our $40 to minus <unk> 40 saw our Gen. AI technology 40, AI is being deployed across both networking and security product and today, we announced the industry's first Iot security generative AI assistant.

Speaker Change: Customers have asked for the AI to help these 30 plus languages.

Speaker Change: Fortinet and it's also the market leader in Ot security solutions, the fastest growing space. The analysis acuity with billions of devices connected online and the most OTT device has a limit pumping empower making almost acuity. The most effective means of secure them.

Ken Xie: Today we announce the FortiGate 200G, a mid-range firewall powered by a new SP540 ASIC with secure computing region of 3 to 10x better performance than our competitors and industry average. We're enforcing our leading security networking and unified SaaS advantage that provides customers with industry-leading security functions, performance, and power efficiency. Before turning the call over to Keith, I wish to thank our employees, customers, partners, and suppliers worldwide for their continued support and hard work.

Speaker Change: Today, we announced a 40 day to 100 G. A midrange firewall powered by our new SB 540, <unk>. The secure computing region of three per ton expected performance downtown Pat Eaters, and industrial average.

Speaker Change: Enforcing our lead into Q&A, working and even SaaS the advantage program.

Speaker Change: The customer because industry, leading security functions performance and power efficiency.

Speaker Change: Before turning the call over to Keith I wish to thank our employees customers partners and suppliers worldwide for their continued support and powered.

Keith F. Jensen: Thank you, Ken, and good afternoon, everyone. Let's start with the key highlights from the first quarter. As Ken mentioned, we continued to manage the business through the macro uncertainty and successfully drove operating margin to a first quarter record of 28.5%, exceeding the high end of the guidance range by 200 basis points. Free cash flow of $609 million represented a 45% free cash flow margin, benefiting from strong Q4-23 billings and their subsequent collection in Q1-24.

Keith F. Jensen: Thank you Ken and good afternoon, everyone.

Keith F. Jensen: Let's start with the key highlights from the first quarter as Ken mentioned, we continued to manage the business through the macro uncertainty.

Keith F. Jensen: Successfully drove operating margin to a first quarter record of 28, 5%.

Keith F. Jensen: Exceeding the high end of the guided range guidance range by 200 basis points.

Keith F. Jensen: Free cash flow of 609 million represented a 45% free cash flow margin benefiting from strong Q4, 'twenty three billings and their subsequent collection in Q1 of 'twenty four.

Keith F. Jensen: Billings of $1.41 billion and revenue of $1.35 billion were within their respective guidance ranges. Looking at buildings in more detail, while Unified, SASE, and SECOPS delivered strong building growth, total buildings declined 6%, as expected. The billing's performance was driven by the difficult year-earlier comparison created by the backlog contribution to billings that occurred in last year's first quarter. Total bookings were down just slightly.

Keith F. Jensen: Billings of one for $1 billion in revenue at $135 billion were within their respective guidance ranges.

Keith F. Jensen: Looking at billings in more detail, while unified SaaS <unk> delivered strong billings growth total billings declined 6% as expected.

Keith F. Jensen: The billings performance was driven by the difficult year earlier comparison created by the backlog contribution to billings that occurred in last year's first quarter.

Keith F. Jensen: Bookings were down just slightly.

Keith F. Jensen: Unified SASE and SECOPS had outstanding growth across a variety of benchmarks in the first quarter. In addition, we saw significant progress from our investments in Unified SASE and SECHA. These include cross-selling into our large installed base. For example, existing customers delivered over 90% of SecOps in Unified SASE buildings. On an even more targeted basis, existing SD-WAN customers delivered 81% of unified SASE billing. Larger enterprises are proving to be our largest customer segment, with large and mid-enterprises representing 78% and 84% of SecOps and Unified SASE buildings, respectively. Even with increasing scale, both pillars have strong pipeline growth.

Keith F. Jensen: Unified SaaS and SEC ops had outstanding growth across a variety of benchmarks in the first quarter.

Keith F. Jensen: And we saw significant progress from our investments in unified SaaS, <unk> and SEC ops.

Keith F. Jensen: These include cross selling into our large install base.

Keith F. Jensen: Existing customers delivered over 90% of SEC ops and unified SaaS billings.

Keith F. Jensen: On an even more targeted basis to existing SD Wan customers delivered 81% of unified SaaS billings.

Keith F. Jensen: Larger enterprises are proving to be our largest customer segment with large and enterprise.

Keith F. Jensen: <unk> mid enterprises, representing 78% and 84% of SEC ops and unified SaaS billings, respectively.

Keith F. Jensen: Even with increasing scale, both pillars have strong pipeline growth.

Keith F. Jensen: 30% for SecOps, and over 45% for Unified SAS. More importantly, within SASE, the SSE pipeline growth is over 150%. Our investment in SASE is being recognized by a third-party agency.

Keith F. Jensen: 30% per SEC ops and over 45% for unified SaaS.

Keith F. Jensen: More importantly, within SaaS, the SFC pipeline growth is over 150%.

Keith F. Jensen: Our investment in SaaS is being recognized by third party agencies.

Keith F. Jensen: We recently recorded the Trifecta, the Gardner-Sassy Magic Quadrants, SSE, SE WAN, and Single Vendor Sassy. And as Ken noted, with last month's addition to SSE, Fortinet now appears in five network security Garden of Magic quadrants, again, all running on a single operating system. With the SASE Magic Quadrant Trifecta, customers have shown increased interest in learning more about our unique SASE platform that runs on one operating system with one unified agent, one management system, and OneDataLite.

Keith F. Jensen: We recently recorded the trifecta, where gardeners SaaS magic quadrants, SSE SD Wan and single vendor staffing.

Keith F. Jensen: And as Ken noted with last month's edition to SSE for it now appears in five network security Gartner Magic Quadrants again, all running on a single operating system.

Keith F. Jensen: With the SaaS Magic quadrant trifecta customers have shown increased interest in learning more about our unique SaaS platform that runs under one operating system with one unified agent one management system and one data Lake.

Keith F. Jensen: To offer an example of customer interest, at our Accelerate conference earlier last month, the SASE demo booth was our most active, as customers surveyed SASE's new features and functions, including end-to-end digital experience monitoring, remote browser isolation, Advanced Data Loss Prevention, and Third Party SD-WAN Connectivity. As a second example, nearly 25% of the Accelerate attendees who joined our CMO for the SASE breakout session. The number of attendees for this breakout session would have been even higher if it wasn't for the fire marshal's regulations that forced us to turn away customers and partners who were eager to hear more about the SASE offering. And to offer one final example...

Keith F. Jensen: To offer an example, a customer interest at our accelerate conference early last month. The SaaS demo Booth was our most active as customers survey of SaaS is new features and functions, including end to end digital experience monitoring remote browser isolation <unk>.

Keith F. Jensen: Vance data loss prevention, and third party SD Wan connectivity.

Keith F. Jensen: The second example, nearly 25% of the accelerated attendees, who joined our CMO for the SaaS the breakout session.

Keith F. Jensen: The attendees number for this breakout session would have been even higher if it wasn't for the fire marshals regulations that forced us to turn away customers and partners, who are eager to hear more about the SaaS offering.

Keith F. Jensen: And to offer one final example, the.

Keith F. Jensen: The customer and partner SASI fast track training program at Fortinet, which launched in January, is already the number two most attended technical training session, although printing only at Single Vendor Sassy Partner, SD WAN. We're committed to driving more effective security solutions worldwide and welcome greater partnership with our industry peers. The new third-party SD-WAN connectivity technology is designed to support consolidation not only on Fortinet but with Fortinet. In terms of scale, we continue to open new Google and Fortinet Pops in sync with our customers' expanding footprint and driving the deployment scale demanded by large enterprises.

Keith F. Jensen: Customer and partner of SaaS, we fast tracked training program at Fortinet, which launched in January.

Keith F. Jensen: There's already a this number two most attended technical training session.

Keith F. Jensen: Training all the single vendor SaaS partner SD Wan.

Keith F. Jensen: We're committed to driving more effective security solutions worldwide and welcomed greater partnership with our industry peers.

Keith F. Jensen: The New third party SD Wan connectivity technology is designed to support consolidation not only on fortinet, but with Fortinet.

Keith F. Jensen: In terms of scale, we continue to open new Google and Fortinet Pops in sync with our customers expanding footprint.

Keith F. Jensen: And driving the deployment scale demanded by large enterprises.

Keith F. Jensen: And a quick update on that seven-figure, 300,000-seat education deal that we mentioned last quarter. The full production environment was activated in March, and we are on track to have those 300,000-plus seats on board to start the new school year. To expand on Ken's earlier comment about today's AR-related announcement, Fortinet's Gen-AI Assistant follows our Forti-AI launch last year by supporting and guiding SOC and NOC teams as they configure and manage changes to their network and investigate and remediate threats. Its intuitive interface allows individuals to interact using 30 different natural languages.

Keith F. Jensen: And a quick update on that seven figure of 300000 seat education deal that we mentioned last quarter.

Keith F. Jensen: Full production environment was activated in March and we are on track to have their 300000 plus seats onboard to start the new school year.

Keith F. Jensen: To expand on Ken's earlier comment about today's AI related announcements.

Keith F. Jensen: Jim AI assistant follows our 40, AI launched last year, but supporting and guiding sock and knock teams because they configure and manage changes to their network and investigate and.

Keith F. Jensen: Immediate threats.

Keith F. Jensen: It's intuitive interface allows individuals to engage using 30 different natural languages.

Keith F. Jensen: Bridge the Industry Skill Shortage. I encourage everyone to visit Fortinet.com to learn more about the JNI system. Rounding out our Billings Commentary, SMB was the top-performing customer segment, International Emerging was our best-performing geography, and our three largest industry verticals continue to be worldwide government, service providers, and financial services. Service providers and worldwide government experienced the highest growth, while retail and financial services were a bit more challenged. As noted in our prior call, the six 8-figure deals in Q4-23 pushed our average contract term in DSO to elevated levels. The average contract term in the first quarter was 27 months, down just under one month year-over-year and three-and-a-half months quarter-over-quarter.

Keith F. Jensen: The industry is skill shortage.

Keith F. Jensen: I encourage everyone to visit for net dot com to learn more about the Gen I assistant.

Keith F. Jensen: Rounding out our billings commentary SMB was the top performing customer segment.

Keith F. Jensen: International emerging was our best performing geography.

Keith F. Jensen: In our three largest industry verticals continue to be worldwide government service providers and financial services.

Keith F. Jensen: Service provider and worldwide government experienced the highest growth, while retail and financial services were a bit more challenged.

Keith F. Jensen: As noted in our prior call. The six eight figure deals in Q4, 'twenty three pushed our average contract term and DSO to elevated levels.

Keith F. Jensen: The average contract term in the first quarter was 27 months down just under one month year over year, and three and a half months quarter over quarter.

Keith F. Jensen: DSO decreased 12 days year-over-year and 23 days quarter-over-quarter to 66 days. Turning to Revenue and Margin. Total revenue grew 7% to $1.35 billion, driven by service revenue growth. Service revenue of $944 million grew 24%, accounting for 70% of total revenue and a revenue mid-shift to services of 10 points. Service revenue growth was led by over 30% growth from Unified SASE and SSEC. However, product revenue decreased 18%, as expected, to $409 million.

Keith F. Jensen: DSO decreased 12 days year over year, and 23 days quarter over quarter to 66 days.

Keith F. Jensen: Turning to revenue and margins total revenue grew 7% to $1 35 billion driven by service revenue growth.

Keith F. Jensen: Service revenue of $944 million grew 24%.

Keith F. Jensen: Counting for 70% of total revenue.

Keith F. Jensen: And the revenue mix shift to services of 10 points.

Keith F. Jensen: Service revenue growth was led by over 30% growth from unified SaaS, <unk> and SEC ops.

Keith F. Jensen: Product revenue decreased 18% as expected to $409 million.

Keith F. Jensen: Coming off a challenging 35% year-earlier compare impacted by backlog fulfillment in the prior year, software license revenue increased 20% and represented a mid to high teams mix of product revenue; total net product bookings were down just slightly. Combined revenue from software licenses and software services, such as cloud and SaaS security options, increased 29 percent and represented an annual revenue run rate approaching $750 million. Total gross margin of 78.1% was up 180 basis points.

Keith F. Jensen: Coming off a challenging 35% year earlier compare impacted by backlog fulfillment in the prior year.

Keith F. Jensen: Software license revenue increased 20% and represented a mid to high teens mix of product revenue.

Keith F. Jensen: Total net product bookings were down just slightly.

Keith F. Jensen: Combined revenue from software licenses and software services, such as cloud and SaaS security options.

Keith F. Jensen: Increased 29%.

Keith F. Jensen: And represented an annual revenue run rate approaching $750 million.

Keith F. Jensen: Total gross margin of 78, 1% was up 180 basis points and exceeded the high end of our guidance range benefiting from the mix shift to higher margin service revenues.

Keith F. Jensen: It exceeded the high end of our guidance range, benefiting from the mixed shift to higher margin service revenues. Service gross margins of 87.9% were up 200 basis points as service revenue outpaced labor cost increases and benefited from the mixed shift towards higher margins for the guard security subscription. Product Close Margin of 55.7% was pressured as we saw challenges related to inventory levels and the transition to a more normalized demand environment.

Keith F. Jensen: Service gross margins of 87, 9% were up 200 basis points.

Keith F. Jensen: Service revenue outpace labor cost increases and benefited from the mix shift towards higher margin 40 yard security subscriptions.

Keith F. Jensen: Product gross margin of 55, 7% as.

Keith F. Jensen: As we said were pressured as we saw challenges related to inventory levels and the transition to a more normalized demand environment.

Keith F. Jensen: Operating margin of 28.5%, with 200 basis points above the high end of our guidance range, reflecting the strong Gross Margins and prudent cost management. Looking at the statement of cash flows, Summary of Funds Slide 16 and 17, the pre-cash flow was $609 million. Adjusted Free Cash Flow, which excludes real estate investments, was $821 million, representing a 61% adjusted free cash flow margin. Infrastructure Investments totaled $222 million, including $212 million of real estate investments. Cash taxes in the quarter were $31 million.

Keith F. Jensen: Operating margin of 28, 5% was 200 basis points above the high end of our guidance range.

Keith F. Jensen: Reflecting the strong gross margins and prudent cost management.

Keith F. Jensen: Looking at the statement of cash flows summarized on slides 16 and 17.

Keith F. Jensen: Free cash flow was $609 million.

Keith F. Jensen: Adjusted free cash flow, which excludes real estate investments was $821 million, representing a 61% adjusted free cash flow margin.

Keith F. Jensen: Infrastructure investments totaled $222 million, including $212 million of real estate investments.

Keith F. Jensen: Cash taxes in the quarter were $31 million.

Keith F. Jensen: And while we did not repurchase shares in Q1, share buybacks have totaled $5.3 billion over the past four plus years, and the remaining buyback authorization is $1 billion. Now, I'd like to share a few significant wins from the first quarter.

Keith F. Jensen: And while we did not repurchase shares in Q1 share buybacks have totaled $5 $3 billion over the past four plus years.

Keith F. Jensen: And the remaining buyback authorization is $1 billion.

Keith F. Jensen: Now I'd like to share a few significant wins from the first quarter.

Keith F. Jensen: I'll start with the one eight-figure deal in the quarter, a competitive displacement and new logo win. This large U.S. financial institution selected Fortinet as part of their data center update and consolidation project. Keys to this win included our experience in this highly-regulated, customer data-sensitive industry and our ability to lower the total cost of ownership and exceed their low latency performance requirements, similar to other large financial institutions separating from their incumbents.

Keith F. Jensen: I'll start with the one eight figure deal in the quarter, a competitive displacement and new logo win.

Keith F. Jensen: This large U S financial institution selected Fortinet as part of their data center update and consolidation projects.

Keith F. Jensen: Key to this win included our experience in this highly regulated customer data sensitive industry.

Keith F. Jensen: And our ability to lower the total cost of ownership and exceed their low latency performance requirements.

Keith F. Jensen: Similar to other large financial institution separating from their incumbent.

Keith F. Jensen: As customers expanding their fortinet footprint by adding our FTE brand solution and planning to consolidate additional technologies.

Keith F. Jensen: This customer is expanding their Fortinet footprint by adding our SD branch solution and planning to consolidate additional technology. Next, in a competitive seven-figure win, a hospitality company that serves over five million guests annually. Updated their various Fortinet solutions, including their FortiGate firewall footprint and FortiNAC solution. Keys to expanding our relationship included our price-to-performance advantage on the firewalls and the next solution's proven ability to discover and lock down devices that attempt to join their network.

Keith F. Jensen: Next in the competitive seven figure win.

Keith F. Jensen: Hospitality company that serves over 5 million guests annually.

Keith F. Jensen: There are various fortinet solutions, including their Florida gate firewall footprint and <unk> solutions.

Keith F. Jensen: Key to expanding our relationship.

Keith F. Jensen: <unk>, our price to performance advantage on the firewalls and the next solutions proven ability to discover and lockdown devices that attempt to join their network.

Keith F. Jensen: Together with the operational simplicity and integration of a dozen different Fortinet solutions for customer users, in another seven-figure deal, a hotel and restaurant chain purchased our SD branch solution for 800 locations, as well as our data center FortiGates for centralized management, and Enhanced Security. This solution from our network security pillar includes firewalls, switches, and access points, as well as a variety of software products. The SE branch solutions bring improved efficiency and security to their branches and IoT devices.

Keith F. Jensen: Together with the operational simplicity and integration of the dozen different fortinet solutions with customer users.

Keith F. Jensen: Yes.

Keith F. Jensen: And another seven figure deal the hotel and restaurant chain purchase our SD branch solution for 800 locations as well as our datacenter, Florida gates for centralized management.

Keith F. Jensen: And enhanced security.

Keith F. Jensen: This solution from our network security pillar.

Keith F. Jensen: Firewall switches and access points as well as a variety of software products.

Keith F. Jensen: The <unk> brand solutions bring improved efficiency and security over their branches and Iot devices.

Keith F. Jensen: Key to this win, and in other retail opportunities, is enabling retailers to deploy, expand, and deliver a growing array of in-store digital solutions to support their customers' experience and increase their top-line performance. As these customer wins illustrate, our security fabric platform includes each of our security pillars. Unified SASE, AI-Driven SecOps, and Secure Network, making the most integrated, most open portfolio products in the industry, all backed by one operating system, Forty OS. One Unified Agent and Forty Clients

Keith F. Jensen: Key to this win and in other retail opportunities.

Keith F. Jensen: Is enabling retailers to deploy expand and deliver.

Keith F. Jensen: Growing array of in store digital solutions to support their customers' experience and increase their top line performance.

Keith F. Jensen: As these customer wins illustrate our security fabric platform includes each of our security pillars.

Keith F. Jensen: Unified SaaS, AI, driven SEC ops and secured networking making.

Keith F. Jensen: Making it the most integrated most open portfolio of products in the industry.

Keith F. Jensen: By one operating system for Pos.

Keith F. Jensen: One Management Console, Forty Managers. One data lake, 40 analyzers, and OpenAPI is an integration with over 500 competitor and other third-party products. This integration allows customers to consolidate security solutions, thereby reducing operational costs while increasing security effectiveness.

Keith F. Jensen: One unified agent 40 client.

Keith F. Jensen: One management console 40 minute here one.

Keith F. Jensen: One data Lake 40, analyzer, and open Apis and integration with over 500 competitor and other third party products.

Keith F. Jensen: This integration allows customers to consolidate security solutions, thereby reducing operational costs, while increasing security effectiveness.

Keith F. Jensen: Moving to guidance, as a reminder, our first quarter and full year outlook, which are summarized on slides 21 and 22, are subject to the disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the second quarter, we expect billings in the range of $1,490,000,000 to $1,550,000,000. Which of the midpoints represents a decline of 1%?

Keith F. Jensen: Moving to guidance as a reminder, our first quarter and full year outlook, which are summarized on slides 21 and 'twenty two.

Keith F. Jensen: Subject to the disclaimer regarding forward looking information that Peter provided at the beginning of the call.

Keith F. Jensen: For the second quarter, we expect billings in the range of $1 billion $490 million to $1.550 billion, which at the midpoint represents a decline of 1%.

Keith F. Jensen: Revenue in the range of $1,375,000,000 to $1,435,000,000, which at the midpoint represents growth of 9%. Non-gap gross margin of 76.5 to 77.5%, and non-gap operating margin of 25.75% to 26.75%. Non-GAAP rates per share are $0.39 to $0.41, which assumes a share count between $775 and $785 million, capital expenditures of $30 to $40 million, a non-GAAP tax rate of 17%, and cash taxes of $240 to $270 million before updating the full year guide.

Keith F. Jensen: Revenue in the range of $1 billion $375 million to $1 billion $435 million.

Keith F. Jensen: Which at the midpoint represents growth of 9%.

Keith F. Jensen: non-GAAP gross margin of 76, 5% to 77, 5%.

Keith F. Jensen: non-GAAP operating margin of 25, 75% to 26, 75%.

Keith F. Jensen: non-GAAP earnings per share of <unk> 39 to 41.

Keith F. Jensen: Which assumes a share count of between 775 and $785 million.

Keith F. Jensen: Capital expenditures of 30 to 40 million.

Keith F. Jensen: Our non-GAAP tax rate of 17% and cash taxes of $240 million to $270 million.

Keith F. Jensen: Before updating the full year guidance I would like to elaborate on the backlog headwinds easing in the second half of 2024.

Keith F. Jensen: I'd like to elaborate on the backlog headwinds easing in the second half of 2024 and share what we believe or what we are starting to see as early signs that the firewall digestion cycle is nearing completion. First, the Billy's headwind from last year's backlog drawdown is over $150 million in 2024 and gradually diminishes throughout the year with no headwind in the fourth quarter. Second, we're looking for early signs of a more normalized firewall market.

Keith F. Jensen: Sure. What we believe we are starting to see is early signs that the firewall digestion cycle is nearing completion.

Ken Xie: For stability as headwind from last year's backlog drawdown is over $150 million in 2024.

Keith F. Jensen: And gradually diminishes throughout the year with no headwind in the fourth quarter.

Keith F. Jensen: Second we're looking for early signs of a more normalized firewall market.

Keith F. Jensen: One metric we watch is the average days to register security service contracts, as shown on slide 19. In 2022, we know that the days to register increased about 50%, which was consistent with customers' buying and stocking behaviors at the time. More recently, this metric decreased by about 25% from its peak and is now consistent with late 2021 levels. It is on a pace to return to normal levels in the second half of 2024. A reasonable read-through of the data is that customers are completing the inventory digestion process and are on the path to a more normalized firewall buying behavior.

Keith F. Jensen: One metric we watch is the average days to register security service contracts as shown on slide 19.

Keith F. Jensen: In 2022, we noticed the days to register has increased about 50%.

Keith F. Jensen: Which was consistent with customers buying in stocking behaviors at the time.

Keith F. Jensen: More recently this.

Keith F. Jensen: This metric decreased by about 25% from its peak.

Keith F. Jensen: And is now consistent with late 2021 levels it.

Keith F. Jensen: It is on a pace to return to normal levels in the second half of 2024.

Keith F. Jensen: A reasonable read through all the data is that customers are completing the inventory digestion process.

Keith F. Jensen: The path to a more normalized firewall buying behavior.

Keith F. Jensen: And with that, for the year, we expect buildings in the range of $6,400,000,000 to $6,600,000,000, and revenue in the range of $5,745,000,000 to $5,845,000,000. Which of the midpoints represents growth of 9%?

Keith F. Jensen: And with that for the year, we expect billings in the range of $6.400 billion to 6.600 billion.

Keith F. Jensen: And the range of $5.745 billion to $5 billion $845 million, which at the midpoint represents growth of 9%.

Keith F. Jensen: Service revenue in the range of $3,940,000,000 to $3,990,000,000, which at the midpoint represents growth of 17%. Non-Gap Gross Margin is 76.5% to 78%. Non-GAAP Operating Margin of 26.5% to 28%. Non-GAAP earnings per share of $1.73 to $1.79, which assumes a share count between $780 and $790 million. Capital expenditures of $350 to $400 million. A non-GAAP tax rate of 17%. Cash taxes are between $500 million and $550 million. I look forward to updating you on our progress in the coming quarters, and I now hand the call back over to Peter to begin the Q&A session.

Keith F. Jensen: Service revenue in the range of $3.940 billion to $3.990 billion, which at the midpoint represents growth of 17%.

Keith F. Jensen: non-GAAP gross margin of 76, 5% to 78%.

Keith F. Jensen: non-GAAP operating margin of 26, 5% to 28%.

Keith F. Jensen: non-GAAP earnings per share of $1 73 to $1 79.

Keith F. Jensen: Which assumes a share count of between 780 $790 million.

Keith F. Jensen: Capital expenditures of $350 million to $400 million.

Keith F. Jensen: The non-GAAP tax rate of 17% and cash taxes of between $500 million and $550 million.

Keith F. Jensen: I look forward to updating you on our progress in the coming quarters I'll now hand, the call back over to Peter to begin the Q&A session.

Peter M. Salkowski: Thank you, Keith. As a reminder, during the Q&A session, we asked you to please limit yourself to one question and one follow-up to allow others to participate. Operator, please open up the line for questions. Thank you. At this time, we will conduct.

Peter: Hey, Heath as a reminder, during the Q&A session. We ask that you. Please limit yourself to one question and one follow up to allow others to participate operator. Please open up the line for questions.

Operator: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A list. Our first question comes from the line of Hamza Fodderwala from Morgan Stanley. Your line is now open.

Peter M. Salkowski: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby will be compile the Q&A roster.

Hamza Fodderwala: Our first question comes from the line of Hamzah <unk> from Morgan Stanley. Your line is now open.

Hamza Fodderwala: Good evening, and thank you for taking my question. Perhaps both Ken and Keith, you spoke to a lot of green shoots in your prepared remarks. SMB, service provider growth looks a little healthier. You're getting recognition on SASE, and you spoke to competitive replacements.

Hamza Fodderwala: Good evening and thank you for taking my question.

Hamza Fodderwala: Perhaps both for Ken and Keith you spoke to a lot of green shoots in your prepared remarks SMB.

Hamza Fodderwala: Service provider growth looks a little healthier youre getting recognition on SaaS and you spoke to competitive replacements.

Keith F. Jensen: That said, the billings in Q1 were a bit closer to the lower end of your guidance versus the high end. So, just curious, you know, what drove that? And what gives you confidence based on what you're seeing in the pipeline to maintain your guidance and continue to assume a re-acceleration of the top line in the back half of the year? Thank you.

Hamza Fodderwala: <unk>.

Hamza Fodderwala: Billings in Q1 was.

Hamza Fodderwala: Closer to the lower end of your guidance versus the high end. So just curious what drove that.

Keith F. Jensen: And.

Keith F. Jensen: What gives you confidence based on what Youre seeing in the pipeline to maintain.

Keith F. Jensen: You maintained your guidance and continue to.

Keith F. Jensen: Assume a reacceleration of top line in the back half of the year. Thank you.

Ken Xie: Yeah, I'll talk about the full year. You know, I think that if you look at where we ended up in the first quarter, inside the guidance range, maybe, maybe just a little bit of weakness that we saw in Europe, just enough to move us off the midpoint, but not really a big movement in terms of where we are in our final results compared to the midpoint. And if we look at where we end up with a total for the year, you know, I don't think we're at all far off from the plan that we thought. You know, maybe there are some more even Tuesdays there that you're kind of pointing out.

Speaker Change: Yes, I'll talk about the full year I think that if you look at where we ended up in the first quarter inside the guidance range, maybe maybe just a little bit of weakness that we saw in Europe, just enough to move us off the midpoint, but not really a big movement in terms of where we are in our final results compared to the midpoint.

Ken Xie: And if we look at where we ended up for the total for the year I don't think were at all far off from the plan that we thought.

Ken Xie: Maybe there's some onesies and twosies or that you are kind of pointing out.

Ken Xie: But as we look at the pipeline.

Ken Xie: But as we look at the pipeline, to your point, I think that the mix that we see in our pipeline today, together with some of the hygiene improvements that we've worked on for the last six to nine months, I think we feel better about where we end up with full year numbers, if you will. I think at the same time, you know, when you look at the full-year numbers and some of the outperformance in the quarter or better performance, if you will, with service revenue and product revenue, you see us bringing that number up a little bit. But importantly, at the same time, you see us also bringing up the margin number, the bottom line, by about three quarters of a point. Yeah, I think the best thing about...

Ken Xie: To your point I think the mix that we see in our pipeline today together with some of the hygiene improvements that we've worked on for the last six to nine months I think we feel better about where we ended up with a full year numbers. If you will.

Ken Xie: I think at the same time when you look at the full year numbers.

Ken Xie: And some of the outperformance in the quarter or better performance. If you will with service revenue and product revenue Youll see us, bringing that number up a little bit but importantly at the same time you see us also bringing up the margin number on the bottom line by about three quarters of a point.

Keith F. Jensen: Yeah, I think the high interest rate, making the money kind of more expensive, has given a lot of enterprises a probably more favored RPEC instead of a CAPEX for some of the networking security projects. So that's where, that's also the reason we started shifting the focus more on the kind of a sassy or kind of secure op, which is really more helping companies save costs at the same time, kind of more moving towards some kind of RPEC model.

Ken Xie: Yes, I think the.

Ken Xie: Hi increasingly.

Ken Xie: Making the money kind of more expensive.

Keith F. Jensen: Have a lot of enterprise kind of.

Keith F. Jensen: Probably more flavor to our pack and was head of our Capex.

Keith F. Jensen: Some of the.

Keith F. Jensen: Now we can secure the project.

Keith F. Jensen: So that's where that's also the reason we started shifting our focus more on the kind of SaaS.

Keith F. Jensen: Or are we just running more helping company saving the cause and same pan kind.

Keith F. Jensen: Kind of more some kind of Opex model.

Keith F. Jensen: So that's probably, at the same time, we do make some adjustment in certain product prices back to like a per pandemic level before the supply shortage that's happening Q1 probably has a little bit of an impact, but overall, I think that the product competitiveness is still very, very strong. We still see a lot of replacement of our competitor product, which is kind of more expensive. And especially the new 40 OS introduced last month with more functions, including all the functions in the unified SASE, all these things, a lot of attention from the customer, and that they are interested in this new OS and the new product we have launched. Thank you.

Keith F. Jensen: That's probably at the same time, we do make some adjustments in some part of price back.

Keith F. Jensen: Back to Mike appropriate that make that level before the supply shortage.

Keith F. Jensen: That's happening in Q1, probably.

Keith F. Jensen: Hi.

Keith F. Jensen: A little bit of impact, but it's.

Keith F. Jensen: But overall I think.

Keith F. Jensen: Yes.

Keith F. Jensen: Product competitive steel Barbara strong have you still see a lot of replacement of a competitive product, we do tend to be more expensive.

Keith F. Jensen: And especially the new 40, Oes introduced last month's made some more function, including all of the.

Keith F. Jensen: Function.

Keith F. Jensen: SaaS E. All of these things.

Keith F. Jensen: Los Angeles on customer.

Keith F. Jensen: Interest too.

Keith F. Jensen: These are new OLED, and then Youll point out we have pumps.

Speaker Change: Thank you.

Operator: Thank you, and please wait one moment for our next question. Our next question is from Gabriela Borges of Goldman Sachs.

Speaker Change: Thank you and one moment for our next question.

Gabriela Borges: Our next question is from Gabriel <unk> of Goldman Sachs. Your line is now open.

Gabriela Borges: Your line is now open. Good afternoon. Thank you.

Gabriela Borges: Good afternoon, and thank you for.

Operator: Ken.

Gabriela Borges: I'd love to get an update on your pricing strategy more broadly more specifically how do you think about the tradeoff between.

Gabriela Borges: Gentlemen, when Youre cross selling a broader portfolio such as tech ops.

Gabriela Borges: Our FCC services versus being able to capture the value from the cross shop, how do you think about that trade off thank you.

Ken Xie: Well, I think our price strategy has been pretty consistent over the last 20 plus years. We want to maintain a healthy growth margin and also a healthy margin for the partners.

Gabriela Borges: I think our price strategy pretty constant in the last 20 plus years, we want to maintain a healthy gross margin and also a healthy margin for the partners.

Gabriela Borges: When we see certain costs increased during the supply chain shortage, whether the component cost some shipping cost increase we kind of increase the price, but now some of the cost coming down we also cannot return some.

Gabriela Borges: Some margin towards upon that and also lower some quite caught up price to match the probe atomic level, but I think all of this approach engine leasing to over and also we probably more focus on the new products and reached for kind of a.

Ken Xie: And when we see certain cost increases, like during the supply chain shortage, whether the component cost or some shipping cost increases, we kind of increase the price. But now that some of the costs are coming down, we also kind of return some margin to the partner and also lower some product prices to match the pandemic level. But I think all this price change is over, and also, we're probably more focused on the new product, which follows kind of a healthy margin guideline. I don't think we address any pricing for the existing product anymore. It's really more focused on when we introduce a new product; we just want to make sure there's a healthy margin for all the partners.

Ken Xie: Healthy margin guidelines.

Ken Xie: We had just any any pricing for the existing put anymore is running.

Ken Xie: We will focus on when we introduce a new part out because I want to make sure. It's as healthy margin for all of the parties.

Speaker Change: Thank you.

Speaker Change: Thank you.

Operator: Thank you, and please wait one moment for our next question. Our next question comes from Brian Essex from J.P. Morgan. Your line is now open.

Speaker Change: And one moment for our next question.

Operator: Our next question comes from Brian Essex from J P. Morgan Your line is now open.

Brian Essex: Great, thank you for taking the time to answer the question. I appreciate it. Maybe maybe for Ken, in terms of the SASE traction that you saw in the quarter, how much was the SD-WAN conversion? And maybe a little bit, if you could give us a little more color on the split of the customers that you saw in that business, the split up maybe large, mid, and small enterprises, so we can get a sense of competitively how you might be lining up against some of the peers in that SASE.

Brian Essex: Great. Thank you for taking the question I appreciate it.

Brian Essex: Maybe maybe for Ken.

Brian Essex: In terms of.

Brian Essex: The SaaS traction that you saw in the quarter, how much was SD Wan conversion and maybe a little bit if you could give us a little more color on the split of the customers that you saw in that business. The split is going to be large mid small enterprise. So we can get a sense of competitively.

Brian Essex: How you might be lining up against some of the peers in that SaaS market.

Keith F. Jensen: I think we have a slide for that.

Ken Xie: And I think that's a great question and I think we'll have a slight slowdown.

Speaker Change: Thank you Mike.

Speaker Change: Ask that question.

Speaker Change: I think we also included in the prepared to read my mind.

Keith F. Jensen: I think that existing customers are over 90% for both SASE and SecOps. So they were just expansion sales. And Ken's kindly pointing out to me my slide number eight that's in the deck that actually gives you a little more context for it. One change you may notice there is that for the first few quarters, when we talked about customer mix and the expansion opportunity, we did it by customer counts, believing that we were going to have a lot of present penetration in the SMB space, and that was where you got a larger number, and we started seeing some patterns.

Ken Xie: Tap dance here about 75 is the actual slide number for you Brian but.

Keith F. Jensen: I think that.

Keith F. Jensen: <unk> customers were over 90% for both SaaS examples.

Keith F. Jensen: SEC ops. So they were expansion sales and currently pointing out to me my slide number eight.

Keith F. Jensen: That actually gives you a little more context for it.

Keith F. Jensen: One change you may notice there is that.

Keith F. Jensen: For the first few quarters, when we talked about customer mix in the <unk>.

Keith F. Jensen: Expansion opportunity, we did it by customer counts, the leaving that we're going to have a lot of present.

Keith F. Jensen: Penetration with the SMB space.

Keith F. Jensen: That was where you would get a larger number to start seeing some patterns.

Keith F. Jensen: What we've now seen is that large enterprises and mid-enterprises are actually dominating both of those pillars of growth, and with that, we've just converted those pie charts to dollar values, which is more traditional where, you know, we expected to get a dollar.

Keith F. Jensen: What we've now seen is that the large enterprises or the mid enterprise or actually dominating both of those pillars of growth and with that we've just converted those pie charts. The dollar values, which is more traditional where we expect it to get eventually.

Keith F. Jensen: Okay.

Keith F. Jensen: Okay, great. Thank you for that. Maybe just as a quick follow up on that topic.

Speaker Change: Okay, great. Thank you for that and maybe just as a quick follow up on that topic and I think you mentioned, if I'm not mistaken unified SaaS fee.

Speaker Change: 81% of.

Keith F. Jensen: SD Wan, 81% of unified CIC Bank, and I think you might be getting that metric back in SD Wan last quarter, if you could.

Keith F. Jensen: I think you mentioned, if I'm not mistaken, unified SAFE, 81% of, I'm sorry, SD WAN, 81% of unified SAFE billings. And I think you might have given that metric back in SD WAN last quarter, if you could Maybe in the recent... Yeah, Brian, what we're trying to say there is that if... I think there's a common belief internally and probably externally that we're gonna have a lot of success with the SASI solution by cross-selling our existing SD-WAN customers. And so the SASI buildings that we saw this quarter, I believe the number was 81% of those were existing SD-WAN customers.

Keith F. Jensen: Yes.

Speaker Change: Yes, Brian what we're trying to say there is that if I may.

Keith F. Jensen: There's a common belief internally probably externally that we're going to have a lot of success with a SaaS solution by cross selling our existing SD Wan customers and so that the SaaS billings that we saw this quarter I believe the number was 81% of those were existing SD Wan customers.

Ken Xie: Yeah, and also we built an ITVM function into the FortiOS, which whenever you have a FortiK, we build like close to 60-70% of the customers all have the FortiK. They have the automatic ITVM function, and so that's where we do see a lot of current ITVM customers, which we're not fully tracking because part of the OS function, we have a charge. So we do believe a lot of them are interested in converting to SASE, and full SASE function there.

Keith F. Jensen: And also we feel that function into the 40 OS.

Keith F. Jensen: Sure.

Keith F. Jensen: Whenever you have a 40 K, we'd beat it like looks like.

Ken Xie: Close to 60, 70% customer I'll have to up by 40 K.

Ken Xie: The <unk> function.

Ken Xie: That's where.

Ken Xie: We do see.

Ken Xie: Steve will comment on customer.

Ken Xie: We cannot 40 tracking because.

Ken Xie: Part of our function, we hung up charge. So we do believe a lot of them are interest will come on into SaaS enforce asking functional.

Keith F. Jensen: That's really helpful. Thank you very much. I really appreciate it.

Speaker Change: Got it that's really helpful. Thank you very much I really appreciate it.

Speaker Change: Thank you.

Operator: Thank you, and please wait one moment for our next question. Our next question is from Fatima Boolani from Citi. Your line is now open.

Speaker Change: Thank you and our next question.

Keith F. Jensen: Our next question is from Fatima <unk> from Citi. Your line is now open.

Fatima Aslam Boolani: Thank you. Good afternoon.

Fatima Aslam Boolani: Thank you good afternoon I appreciate you taking my questions.

Fatima Aslam Boolani: Keith I wanted to have you spend a little bit of more time talking about some of the geographic theater level performance. So we've seen a pretty material deceleration in your Americas business and he has been.

Keith F. Jensen: I appreciate you taking my question. Keith, I wanted to have you spend a little bit of more time talking about some of the geography theater level performances. So we've seen a pretty material deceleration in your Americas business, and you have been, you know, relatively resilient, and Apex actually shrunk this quarter. So I was hoping you could put a lens on each one of those geographies to talk about any nuances or idiosyncrasies from a demand and or buying perspective from an end market standpoint or a customer attribution standpoint.

Keith F. Jensen: Relatively resilient in APAC actually shrunk this quarter. So I was hoping you could put a.

Keith F. Jensen: Our lens on each one of those geographies to talk about any new.

Keith F. Jensen: Your line failure idiosyncrasy is from Matt demand and are buying perspective from an end market standpoint, or each customer attribution standpoint, and then just a follow up with regards to if you can talk about.

Keith F. Jensen: And then just a follow-up with regard to whether you can talk about the pipeline and pipeline growth you're seeing with secure FD land proper considering that is such an important conduit for future SASE upsells. Thank you.

Keith F. Jensen: The pipeline and pipeline growth Youre seeing with.

Keith F. Jensen: Secure SD Wan Cropper, considering that is such an important conduit for future Safi upsell. Thank you.

Keith F. Jensen: Okay, where to begin? The kind of cherry picking through some data points, I think one, first and foremost, the SMB, you know, continues to perform stronger than expectations, whether that's external to the company or from other sources, if you will. It's very resilient. And I think it's simply the breadth of the SMB space together with, as I've said in the past, the success of the channel program. I think Europe was just a tad bit light in the quarter, and a little bit on the enterprise side of their business, and probably just enough, as I said before, to move us off of the midpoint of our guidance.

Speaker Change: Okay, where to begin.

Keith F. Jensen: Yes.

Keith F. Jensen: I kind of Cherry picking through some data points I think first and foremost the SMB continues.

Keith F. Jensen: <unk> continues to perform stronger than expectations, whether that's external to the company or from other sources. If you will is very resilient and I think it's simply the breath of the SMB space together with as I've said in the past the success of the channel program.

Keith F. Jensen: Europe was just a tad bit lighter in the quarter and a little bit on their enterprise side of their business and probably just enough as I said before to move us off of the midpoint of our guidance.

Keith F. Jensen: I think what we've spent a fair amount of time on more recently is looking at where the eight-figure deal is coming from. And if you're looking at the deceleration, and let's take the U.S. enterprise as an example of that, you know, last quarter, we talked about six eight-figure deals in the business. The vast majority of those were in the U.S. enterprise. This quarter, we generally noted that we had one eight-figure deal.

Keith F. Jensen: I think what we spend a fair amount of time with more recently is looking at where the eight figure deals coming from Ken If youre looking at the deceleration and let's take the U S enterprise as an example of that.

Keith F. Jensen: Last quarter, we talked about six to eight figure deals.

Keith F. Jensen: In the business.

Keith F. Jensen: Vast majority of those were in the U S enterprise.

Keith F. Jensen: And so you can see that those eight-figure deals can whipsaw that growth rate for the U.S. enterprise around quite a bit, really because of their opportunities in these eight-figure deals that maybe some of the other geos don't have. You know, we really don't have those opportunities in APAC and some of the other geographies that we see in the U.S. I think the other part of growth, I mean, I think we have to understand where the firewall growth is right now in terms of the industry.

Keith F. Jensen: This quarter, we generally noted that we had $1 eight figure deal.

Keith F. Jensen: And so you can see that those eight figure deals can can whipsaw that growth.

Keith F. Jensen: Right for the U S enterprise around quite a bit really because if there are opportunities in these eight figure deals that maybe some of the other geos don't have we really don't have those opportunities in APAC.

Keith F. Jensen: And some of the other geographies that we see in the U S.

Keith F. Jensen: I think the other part of growth I mean, I think we.

Keith F. Jensen: I think we have to understand where the firewall growth is right now in terms of.

Keith F. Jensen: The industry and with that it puts a lot of pressure of opportunity for.

Keith F. Jensen: And with that, it puts a lot of pressure or opportunity on us to sell the SASE solutions and the SECOP solutions. And you're probably seeing a little more maturity in the ability to sell or the openness to buy SECOPs and SASE solutions in the U.S. and in Europe, the larger economies than you are in APAC.

Keith F. Jensen: Tough to sell the SaaS solutions in the <unk> solutions, and you're probably seeing a little more maturity in the ability to sell or the openness Dubai second office of SaaS solutions in the U S and in Europe, the larger economies than you are in APAC.

Ken Xie: Also, Japan is the biggest country for us in APEC, probably one third or more of APEC, and the currency, like the U.S. currency, is pretty strong against the Japanese currency recently, that may also have some impact of some slowdown there. On the other side, we do see most SD-WAN customers definitely have more interest in the SASE. And also, in the current environment, more and more customers are starting to turn on SD-WAN because SD-WAN definitely gives them cost savings.

Keith F. Jensen: You also get

Speaker Change: We're also Japan, probably comment Bob.

Keith F. Jensen: The country for us in APAC.

Ken Xie: Probably one third or more APAC, which had.

Keith F. Jensen: Currency U S currency pretty strong against a concurrency with somebody that may also have some impact.

Keith F. Jensen: Some slowdown there.

Keith F. Jensen: On the other side, we can see.

Keith F. Jensen: Most SD Wan customer definitely more interest in the SaaS and also in the current environment.

Keith F. Jensen: More and more customer set and Tom SD Wan because <unk> it gave them a cost saving so averages about 50% cost savings compared to traditional <unk>.

Keith F. Jensen: Now working.

Ken Xie: So our average is about 50% cost savings compared to the traditional MPIS or other networking functions there. So we do see more and more customers first converting to SD-WAN customers and then using the SIN45 to start adding additional statute functions.

Keith F. Jensen: In there so we do see more and more customer first cover into SD Wan customer on them.

Keith F. Jensen: Within clinical study.

Ken Xie: Additional statute function there.

Speaker Change: Thank you.

Operator: Thank you, and one moment for our next caller. Our next question comes from Tal Liani of Bank of America. Your line is now open.

Speaker Change: Thank you and our next caller.

Tal Liani: Our next question comes from Tagliani of Bank of America. Your line is now open.

Tal Liani: Hi guys. I gave some comments at the end of your prepared remarks about signs of recovery of the... Would you mind if I repeat that? You went over it quickly.

Tal Liani: Hi, guys.

Tal Liani: You gave some.

Tal Liani: <unk> comments at the end of your prepared remarks about signs of recovery of this of the.

Tal Liani: The firewall market.

Tal Liani: Would you mind to repeat that you went through very quickly.

Tal Liani: The question is also, with it, do you expect the non-forti-gate to recover? Is there a correlation between the two? Do you expect the non-forti-gate to recover, or does it have its own cycle? On the first question, which is about the firewall recovery.

Tal Liani: My question is also with it.

Tal Liani: Expect the non 40 gate to recover is there a correlation between the two.

Tal Liani: Do you expect the non 40 gig to recover and or does it have its own cycle.

Tal Liani:

Tal Liani: On the first question, which is about the firewall recovery.

Tal Liani: Do you see that the market share situation is changing? The share gains you experienced in the three years of the boom cycle, do you have any reason to believe that they're going to slow down, or are you going to maintain market share gains? How does it change when the market recovers? What drives the share dynamics to change or to stay stable?

Tal Liani: Do you see that the.

Tal Liani: Market share situation is changing.

Tal Liani: The share gains you experience in the three years of the boom cycle.

Tal Liani: Do you have any reason to believe that it is.

Tal Liani: Going to slow down or youre going to maintain market share gain how does it change when the market recovers what drives the share dynamics to change or to stay stable.

Tal Liani: Thanks.

Keith F. Jensen: You want to take the market share and the dynamics, and then I'll go through the algebra on slide 19.

Speaker Change: You want to take the market share dynamics, and then I'll go through the algebra.

Ken Xie: Yeah, I think we continue gaining market share, even right now in the last quarter, in what we call secure networking, which both the firewall and also some other like 40 Wi-Fi, 40 satisfied space there. Because whether the strong performance advantage we have, all kinds of more functions can give a customer like a better ROI return and better security, and also more deployment cases compared to the traditional firewall.

Tal Liani: Slide 19, I think we believe we continue gaining market share.

Keith F. Jensen: Even right now other quarter last quarter.

Ken Xie: We call secure networking.

Ken Xie: Both the firewall and also some module.

Ken Xie: For the Wi Fi or 40 southeast space there.

Ken Xie: And.

Ken Xie: I think.

Ken Xie: Because whether the strong performance advantage, we have all kind of a more function can became a customer.

Ken Xie: Like a better return on the benefit acuity.

Ken Xie: Also multi point case compared with the traditional firewall. So we feel we're keeping gaining market share, but overall I have to say.

Keith F. Jensen: So we feel we're still gaining market share. But overall, I have to say that whether the network security firewall market or the networking market is definitely going down like 10% to 20% year over year. But even in that market condition, we're still gaining more market share in this environment. Keith probably answered the digesting question. Yeah, for people that have access to it, slide 19 in the deck.

Ken Xie: Whether that was a Q4 module with Allison Malkin market definitely is going down.

Keith: September 20% year over year.

Keith F. Jensen: But even in that market condition, we're keeping gaining more share market share in this environment Keith Pueblo answered.

Keith F. Jensen: Yes.

Keith: But yes for people that have access to a slide 19 in the deck.

Keith F. Jensen: And for those of you who have followed the company for quite a while, you remember that we had some pressure on software revenue early in the pandemic, and we talked about things like the impact from Russia, but also that we were seeing a delay in customers registering the service contracts that attach to the hardware contracts. And if you look at that chart, you can see that that delaying activity really started at the end of 2021, peaked at the end of the beginning of 23, kind of plateaued, and now has moved down.

Keith: For those of IV or followed the company for quite a while and you remember that we have some pressure on software revenue.

Keith F. Jensen: Early in the pandemic.

Keith F. Jensen: We talked about things like the impact from Russia, but also that we were seeing a delay in customers registering.

Keith F. Jensen: The service contracts that are attached to the hardware contracts.

Keith F. Jensen: If you look at that chart, you can see that that that delaying activity really started at the end of 2021 Pete.

Keith F. Jensen: At the end of the beginning of 'twenty three.

Keith F. Jensen: <unk> now has moved down in what we believe is youre seeing there is that when the supply chain hit customers bought the equipment put it on the shelves and did not need to register the contract as quickly and Thats why you saw the increase of days of registered now as we move through the digestion cycle, you are seeing that inventories come off.

Keith F. Jensen: And what we believe you're seeing there is that when the supply chain hit, customers bought the equipment, put it on the shelves, and did not need to register the contract as quickly. And that's why you saw the increase in the days to register. And now, as we move through the digestion cycle, you're seeing that inventories are coming off their shelves, and those days to register are starting to return to normal. We're not quite there, but we're actually quite close to it.

Keith F. Jensen: Their shelves and those days to register are starting to return to normal we're not quite there, but we're actually quite close to it.

Keith F. Jensen: And I would just add that, as I said, by the second half of this year at the current pace, we would return to where we were at pre-COVID on that metric. And again, we think that's a very good indicator of where customers are in the digestion cycle.

Speaker Change: And I would just offer that I think as I said by the second half of the second half of this year on the current pace, we would return to where we were at pre COVID-19 on that metric and we again, we think thats a very good indicator of where customers are in the digestion cycle.

Keith F. Jensen: Yes.

Keith F. Jensen: Got it. And what about the question on non-forti-gate? What are the cycles with the non-forti-gate on the non-forti-gate?

Speaker Change: Got it and what about the.

Keith F. Jensen: Question on non 40 gate.

Keith F. Jensen: What are the cycles with a non 40 gig.

Speaker Change: 40 gig side.

Keith F. Jensen: Well, first of all, you're gonna get me in trouble for using the term "non-FortiGate." We talk about SAS and tech ops, but we're all showing our age here a little bit.

Speaker Change: Well first of all you're going to get me in trouble for using the term non Florida Gabe will talk about SaaS Tech ops were all showing our age here a little bit.

Ken Xie: The non-FortiGate products probably account for around 10% of our... product. That's probably, I think on the networking side, definitely down a little bit, but there are some other, like whether the Fortinet Web, Fortinet Mail, some others, we see Fortinet Mac, we see pretty strong growth, so it's a mix, but overall, I think pretty much similar to Fortinet, but definitely we see, and on the other side, we do see some early signs of interest, customers using our full Wi So that's also one of the promotions we're going to run.

Keith F. Jensen: Okay.

Keith F. Jensen: The non op politically probably come probably around 10%.

Keith F. Jensen: <unk>.

Keith F. Jensen: Florida.

Ken Xie: That's probably.

Ken Xie: And then we will get that definitely down a little bit, but there's some other lack of weather to 40 were $40 million a module.

Ken Xie: Yes.

Ken Xie: Eight.

Ken Xie: Matt we see pretty strong growth.

Ken Xie: Mix, but overall I think pretty much similar like the.

Ken Xie: <unk>.

Ken Xie: But definitely we see other side we.

Ken Xie: We do see some some early signs of interest customer using our food.

Ken Xie: Wifi AP.

Ken Xie: For this to make us our agent for the SaaS.

Ken Xie: So that's also why the promotion.

Ken Xie: It's where they offer some customers, if they get a 40 Wi-Fi, they probably can run some free 40 SASE functions for some time. So that's what we see could be driving the additional non-40 gate growth. But actually, all the non-40 gate products, we also have a technology we call the 40 link. It's all linked with a 40 gate, like a 40 gate, whether it's kind of a Nigel Farwell host or SASE host working together with 40 Wi-Fi or 40 switch.

Ken Xie: We're going to it's really offer some customer.

Ken Xie: If we kind of 40 Wi Fi the property can draw some free 40 SaaS function for some time.

Ken Xie: Thus, we see could be driving additional non a 40 gig gross about extra autonomic 40 gig part out. We also have a technology, we called 40 link and saw a decrease of 40 K 40.

Ken Xie: <unk> kind of.

Ken Xie: Okay.

Ken Xie: Now imagine firewall wholesale SaaS the hosts to walk into Canada.

Ken Xie: 40, Wi Fi 40 switch.

Speaker Change: Thank you.

Operator: Thank you, and please wait one moment for our next question. Our next question is from Rob Owens of Piper Sandler. Your line is now open.

Speaker Change: Thank you and one moment our next question.

Ken Xie: Our.

Operator: Next question is from Rob Owens with Piper Sandler Your line is now open.

Robbie David Owens: Thank you very much. Keith, I want to build a little bit on your answer to Fatima's question earlier. And I believe you use the technical term of whipsawing when it comes to growth, when you saw six large transactions, very large transactions in Q4, one in Q1. And just, I want to ask it relative to health and enterprise and what you're seeing here in the pipeline. And should we expect similar types of results in terms of those very large deals as we move throughout the year? And how do you think the pipeline is setting up in terms of the relative health of the enterprise? Thanks. Yeah.

Robbie David Owens: Thank you very much Keith I wanted to build a little bit on your answer to <unk> question earlier, and I believe you use a technical term of <unk>.

Robbie David Owens: <unk> when it comes to growth when you saw six large transactions regular transactions in Q4, and one in Q1 and just I wanted to ask it relative to health and enterprise and what Youre seeing here in the pipeline and should we expect similar types of results in terms of those very large deals as we move throughout the year.

Robbie David Owens: And how do you think the pipeline is setting up in relative health of the enterprise.

Keith F. Jensen: Yeah, I feel good about it. And I think the parallel that I've drawn in conversations before is that if you went back to 2015-16, you saw the company moving away from or expanding beyond the S&P space and doing million-dollar deals. But it wasn't that there were enough million-dollar deals so we couldn't get whipsawed by them then. Now we've got plenty, well, I could always take more, plenty of million-dollar deals, but the $10 million deals are whipsawing us around a little bit.

Keith: Yes, I feel I feel good about it.

Robbie David Owens: The parallel that I've drawn in.

Robbie David Owens: Conversations before is that if you went back to 2015 and 16, you saw the company moving away from or expanding beyond the SMB space and doing $1 billion deals, but it wasn't that there was enough of a million dollar deals that we couldnt get whip side by them and now we've got plenty of capital.

Keith F. Jensen: Ignore plenty of million dollar deals, but the $10 million deals are whipsawing us around a little bit you.

Keith F. Jensen: You saw that with a very strong performance in the fourth quarter, and I think we were pretty open about that in the fourth quarter, setting expectations for the first. One thing we have spent some time doing is going back and looking at the number of eight-figure deals we have had by quarter for, say, the last three or four years, and you're looking at a model that maybe had one every other quarter five years ago to now, where you probably average something on the order of two, perhaps three, opportunities.

Keith F. Jensen: You saw that with a very strong performance in the fourth quarter and I think we're pretty open about that in the fourth quarter as setting expectations for the first.

Keith F. Jensen: One thing we would have spent some time doing is going back and looking at the number of eight figure deals we have by quarter for say the last three or four years and Youre looking at a model that maybe had one every other quarter five years ago.

Keith F. Jensen: Now, where you're probably averaging something on the order of two perhaps three of opportunities.

Keith F. Jensen: You know, over a full year per quarter, they're going to get condensed sometimes in certain quarters. With our business model in history, you see that Q4 obviously outperforms, as does Q2 typically perform strongly. And I suspect as we look forward, we'll see a little more concentration on those eight-figure deals, certainly in Q4 and maybe some in Q2.

Keith F. Jensen: Over a full year per quarter, because theyre going to get condensed sometimes in certain quarters.

Keith F. Jensen: With our business model and the history, you'll see that Q4, obviously outperformed as does Q2 typically performed strongly and I suspect that as we look forward, we will see a little more concentration of those eight figure deals certainly in Q4 and maybe some in Q2.

Speaker Change: Thank you.

Operator: Thank you, and one moment for our next question. Our next question is from Saket Kalia of Barclays. Your line is now open.

Speaker Change: Thank you and our next question.

Saket Kalia: Our next question is from Sicad Kalia of Barclays. Your line is now open.

Saket Kalia: Okay, great. Hey, guys, thanks for taking my questions here. Ken, maybe the first one is for you. I was wondering if you could just talk a little bit about how your conversations are going with customers around their plans to refresh their firewall appliances, and maybe specifically, when would we sort of expect that firewall refresh to sort of begin? Does that make sense?

Saket Kalia: Okay, Great Hey, guys. Thanks for taking my questions here.

Ken Xie: Yes. I see there's a three-part of a...

Ken Xie: The business One is, like Keith mentioned, really the digestion, whatever, supply chain issue. I think that's pretty much over; maybe just a few more months it will all be normal. And the second part is really the refresh, which is getting the current customer over to the new product, which has better performance, all these things there. But I have to say, during an economic slowdown or high interest rate environment, some customers may stretch the current product a little bit longer.

Ken Xie: And but we do see more cases, we call them replacement, and also new areas, like OT, and IoT security. So we do see the replacement pick up quite well, which when they're facing, like, whether they need a new function, like the new SD-WAN function, or the static function, a lot of big enterprises start using our product to replace a more competitive product because they have to offer, like, multiple products to match one of our 40 gate, 40-wire solution there.

Ken Xie: And we also have much better performance and power efficiency. We use in-situ computing to measure performance for every product. So that's the replacement case, definitely picking up quite well. The refresh probably would still need some time to come.

Ken Xie: And on the other side, the new areas, like OT, and IoT security, we see very, very strong growth. So that's a new market, because usually all these OT devices do not connect online, or connect online has no protection, and it's pretty much impossible to run endpoint software because of different operating systems and limited computing power. So we see this new OT, and IoT space pick up quite well. That's the new market. So long-term-wise, I still believe the network security market will continue to grow, like 10 to 20%, but probably will be more mixed in the current environment, probably a little bit more towards the all-packs model, which is kind of a SASE.

Ken Xie: But for us, the differentiation is really that we have all the SASE functions in the same 40-gate operating system, the 40 OS, which a customer can run right on-premise or in the cloud and on top. So we do see a lot of customers starting to turn on the SASE function, maybe starting to turn on the C1 function first, and then the additional SASE functions, and additional SASE services. So that's the way they are starting to do it now.

Saket Kalia: Got it. Got it.

Ken Xie: And maybe the follow-up is on that point, Ken, if I can stay with you. Just on that topic of refresh and replacement, is there any sort of change in thinking for those customers about firewall versus SASE? And I mean, as part of this discussion, you mentioned pricing earlier. Are you getting any sort of pushback on just appliance pricing since the prior round of adjustments that you did sort of during the supply chain?

Saket Kalia: We have not seen any pricing pressure at this time because we tend to be much better performing and have more functions because of ASIC technology and not our competitor has. On the other hand, when COSMOS considered a new function they needed for security or higher network speed, I think I compared us to some competitors because competitors sometimes they just cannot keep adding new functions like all the SD-WAN or the SASE functions in their existing firewall. For us, it's very, very different.

Ken Xie: So we have all the SD-WAN functions, all the new SASE functions built in to the same FortiOS running on different kinds of FortiGate devices there, so that's also kind of helping customers to really keep adding additional functions sometimes without really replacing the existing hardware. So that's really helping the customer keep kind of adding service and enhance security with the new function there. And that's also driving a lot of replacement of our competitor's solution, especially in the big enterprise environment.

Ken Xie: So that's where you see the strongest growing area for us actually is the enterprise customer, which a lot of the – and there's some finance stress because of the high cost of money, but we do see that the growing enterprise space is very, very strong and a lot of replacement of competitor solutions using the FortiGate, which has more functions, better performance, lower cost, and also is more efficient in its energy consumption.

Operator: Super helpful. Thanks, guys. Thank you and one moment.

Brad Alan Zelnick: Thank you and one moment for our next call. Our next question comes from Brad Zelnick of Analyst. Your line is now open.

Brad Alan Zelnick: Great. Thank you so much for taking my questions.

Brad Alan Zelnick: And because we just had two for Ken, I think I'm going to now go for two with Keith, if we can. Keith, the first one, I think, pretty straightforward with a billion dollars left in your buyback authorization and the strong cash generation of the business. I was surprised to see you not buy back any stock in the quarter. Can you just remind us of your approach to buybacks?

Keith F. Jensen: Peter's pointing at our COO for M&A answers, so we're all listening, leaning forward to hear what he wants to say. I don't think there's been any real change in our buy-back philosophy. The term we use is that we're very opportunistic.

Keith F. Jensen: We do put a program in place with one of the Wall Street firms each quarter, and we renew it. I think the important part there is looking at the $5 billion that we've bought back over the last four years, and it's not that we're doing, you know, some other companies would do X percent of free cash flow or something like that. It is really looking for market opportunities, and when we see them, Ken typically steps in and has something set up in that regard. And now our COO, John Whittle, has been getting a chance to join. Thanks, John.

John Whittle: On M&A, thank you for the question. On M&A, we've always been very, very disciplined. We've done some very strategic tech and talent tuck-ins, and I think you'll see we're open-minded. You know, we consider M&A as it makes sense, but, you know, that's definitely been our approach so far, and, you know, I think you'll see that approach continue, although we will be open-minded about M&A as it makes sense.

Brad Alan Zelnick: Thank you for that and, maybe just my follow-up.

Keith F. Jensen: We see a lot of opportunity.

Keith F. Jensen: Got it. That makes all the sense in the world.

Keith F. Jensen: You guys have done a great job with it over the years. Maybe just on the margin discipline and the leverage that we're seeing in the quarter, Keith, could you maybe just give us an update on headcount plans and where you are year-to-date, and maybe relative to three months ago, how enthusiastic you are and where you are in pushing or pulling back on the throttle to continue hiring and how we should think about Office. Thank you.

Ken Xie: It's okay. I think we continue to invest, balance growth and margin. So the area like a lot of R&D long-term products, we continue to invest, and we do selective hiring.

Keith F. Jensen: And also, we also take this opportunity to make the management ratio or structure a little bit better. So it's more investing in the field, sales engineer, and also the R&D area, and the kind of more flat at certain management levels, making the whole company more efficient. Yeah, I think the setting aside the fact that I need more resources and finance, but I was hoping Ken was just going to announce that, but it's probably not.

Keith F. Jensen: I think the business model, Brad, you've seen it through the cycles where, you know, if you look back at 2017, for example, and you look at the gross margin number, you know, when you start to see the slowdown or the pause, the cycle in the hardware, you start to see the mix shift to really rich services. And then as the market recovers, you see that relationship change a little bit. Clearly, we're in a situation right now where the firewall market has shifted 10 points of services, and I think that was 87% gross margin. It's making margin targets very achievable, let's put it that way.

Keith F. Jensen: And I would imagine, I think we raised it by three quarters of a point at the midpoint for the full year. That's a pretty big move. At this point, and I think we feel very comfortable with that, as we look at the rest of 2024. Excellent, thank you.

Operator: Thank you. And one moment for our next question. Our next question comes from Ben Bollin of Cleveland Research Company. Your line is now open.

Benjamin James Bollin: Thanks, I appreciate you taking the question. Good afternoon, everyone. Keith, I was hoping you could talk a little bit about the receivables drawdown and DSO performance. I believe you made a comment in your prepared remarks about the large steel impact and collections, but it does look like DSOs are below what we've seen for the last few years. So I'm curious if there's been a change in working capital management, anything

Keith F. Jensen: No, I don't think it's really changed. I think there's always a few puts and takes, if you will. I think the real driver was that last quarter we had those six eight-figure deals, and I believe all those closed in the last week or two of the quarter. And so that put a lot of pressure on DSOs. And only having one eight-figure deal this quarter, which I believe closed fairly early in the quarter, I mean, mid-quarter, but not in the last week. So I think that's really all I would point out there.

Benjamin James Bollin: Okay, and the last one for me, you talked a little bit about duration. If you step back, a lot of your business is done through the partner community. Do you have any thoughts on how much of that business is being financed by the partners themselves to manage this, you know, kind of CapEx to OpEx appetite? Any thoughts there would be helpful.

Keith F. Jensen: Thanks. Yeah, I think when you say partners, I would say that all the largest.

Keith F. Jensen: Yeah, I think when you say partners, I would say that all the large distributors that we're working with are offering financing programs either, you know, in some cases, it might be through their own captive, but I think more often than not, it's white labeling somebody else's product, if you will. I think that also some of the larger resellers are also offering financing. I think that, you know, where it makes a little more sense for us as an OEM is on larger deals.

Keith F. Jensen: You know, whether we move to the extended payment program or work with the channels, providing them capital, if you will, for the financing. I think there are a lot of different ways to go there, but I don't think that, I don't think good credit, so to speak, are suffering because they can't find credit. I don't think that's the issue.

Operator: Thank you, and one moment for our next question. Our next question comes from Adam Borg of Stifle. Your line is now open.

Adam Charles Borg: Awesome, and thanks so much for taking the questions. Maybe for Ken, you know, last quarter you talked about doing a great job with increasing traction with enterprise agreement. And I was hoping you could talk. Obviously, I know 1Q is typically a smaller EA quarter. Perhaps talk a little bit more about the EA strategy overall and the go-to-market efforts to more systematically drive these enterprise agreements, especially in the back half of this year.

Ken Xie: Yeah, I think we do see when we have an enterprise customer, and they also want to be a long-term customer, and also with many different products, like the consolidation strategy they have right now, we see more EA. And at the same time, with that one, we definitely see kind of a bigger deal and also a kind of a more long-term customer working with us right now.

Keith F. Jensen: Yeah, I think that John took this over, so he gets to make the victory lap on the EA's, but you know, as Ken kind of alluded to it, it tends to make a lot of sense when you're usually going to see it as part of your expansion inside of a larger enterprise. You're probably not going to see it frequently with your very first sale into a new logo, but you could.

Keith F. Jensen: And I think some things that are really starting to resonate there are the new 40 points program that we make available and things of that nature where customers have reached that point where they're very comfortable with Fortinet for the technology and our customer support, et cetera, and they start thinking about long-term relationships. They know they're going to buy more. They may not know it, but the combination of EAs and 40 points, I think, has been well received by the customer group.

Adam Charles Borg: That's great, and maybe just as a quick follow-up in the slide deck, I didn't recall seeing the breakdown of the FortiGate by small, medium, and large. I know that indicator has been less meaningful more recently. I'm just curious if there's anything interesting there as you think about the FortiGate sales by size. Thanks again. Now, yeah, thank you.

Keith F. Jensen: Now, I think you alluded to it, I think it's really, you see us, you know, at this point in the firewall life cycle, firewall cycle, it's really, for us, we want to increase the focus on SASI. I think we feel very good about it. You see, it's adding some more information there, and to your point that it wasn't anything that was really new or earth-shattering on the Fort Great, thanks for asking.

Operator: Thank you, and please wait one moment for our next question. Our next question comes from Keith Bachman of BMO. Your line is now open.

Keith Frances Bachman: Good afternoon. Thank you very much.

Keith Frances Bachman: Good afternoon, and thank you very much Peter and Keith I appreciate the slide that declined 7% to eight to.

Keith Frances Bachman: To be quite interesting and wanted to focus my first question on that.

Keith Frances Bachman: If you look at.

Keith F. Jensen: And Peter and Keith, I appreciate the slides. I did find slides seven and eight to be quite interesting and want to focus my first question on that. And if you look at the amount of billings from SASE, 24%, is there just any clarification on how much of that 24% is SD-WAN? And then if I look at SECOP, really interesting that Enterprise is 40% of the SecOps, and is there just any patterns or anything that's kind of bubbling up as a frequent purchase within the SecOps portfolio you have that is serving to be pretty interesting to the Enterprise?

Keith F. Jensen: I thought that 40% number was quite interesting. And believe it or not, I'm going to count that as one question. And then, Keith, just anything you could think about or guide us on the FortiCare support line item as we think about the correlation to product sales. And then I will cede the floor before Peter gets a chance to cut me off.

Keith F. Jensen: Patterns or anything Thats kind of Bubbling up is a frequent purchase within the SEC SEC ops portfolio you have that is serving to be pretty interesting.

Keith F. Jensen: I can go in reverse order and cover FortiCare and FortiGuard. I think it's a great question.

Keith F. Jensen: FortiCare, which is the traditional support offering; we talk about services being a lagging indicator. It's really what did you sell before and what are you recognizing now. And what's important is that FortiCare is going to be more closely linked to more recent product sales, right, because you have fewer products to attach it to, so you'll probably see a little more pressure on FortiCare there. FortiGuard, which is the security subscriptions, which can be bundled, but they can also now be a variety of SecOp solutions.

Keith F. Jensen: I can go reverse what I uncover 40Care, 40Gard. I think it's a great question is, you know, 40Care, which is, you know, the traditional support or offering.

Keith F. Jensen: [music].